Introduction (added September 9, 2008): The CMS rules for structured settlements and MSAs are dynamic and subject to change and conflicting interpretations. Since S2KM published this post, S2KM and Thomas Spratt became aware of an additional and more recent CMS policy memorandum dated August 20, 2008. Please see S2KM's subsequent blog post titled "MSA Update - 3C" for more current information about the CMS rules for life expectancy and rated ages. This new CMS policy memo makes Tom's comments below about past CMS changes and inconsistencies with age ratings all the more relevant and valuable.
A prior S2KM blog post (MSA Update - 3A: Structured Settlement Annuities) introduced Thomas Spratt as a Medicare set-aside (MSA) expert. This post continues that conversation and looks more closely at MSA cases involving structured settlement annuities. S2KM's interview with Thomas Spratt is part of two related S2KM series:
- Growing the Structured Settlement Market
- Medicare Set-Aside Update
S2KM is also capturing and featuring the "Growing the Market" series in S2KM's Structured Settlement Wiki.
S2KM: S2KM's earlier blog post (Medicare Set-Aside Update - 2) summarizes current CMS rules for structured settlements and MSAs. What about these existing CMS structured settlement rules strikes you as most significant?
TOM SPRATT: Two requirements jump out at me as significant. First, although CMS requires two years of seed money, the annuity must begin funding within one year. Despite this CMS "over-funding" requirement, annuities still may cost less than lump sum alternatives because of the set-off method CMS uses to calculate present value. Second, the CMS payout rules for structured settlements favor temporary life annuities - the shorter of actual life and a fixed term estimating life expectancy. Beginning July 1, 2008, CMS calculates life expectancies based upon a life table for the total population (Table 1) developed by the Centers for Disease Control (CDC). If an MSA beneficiary lives beyond the projected life expectancy, a potential shortfall could arise that would unfairly burden either Medicare or the MSA beneficiary.
S2KM: Is CMS enforcing its MSA structured settlement rules consistently?
TOM SPRATT: In my experience, yes. Prior to July 1, 2008, there was some confusion and inconsistency with rated ages supplied by annuity providers which CMS utilized to determine life expectancy. CMS initially used the "mean" when several rated ages were submitted, then changed to the "median". CMS also rejected rated ages for determining life expectancies from annuity providers affiliated with casualty insurers without restricting the purchase of an annuity from these companies. In its May 20, 2008 policy memorandum, however, CMS announced it would only accept life expectancies obtained from CDC Table 1. S2KM note: the May 20, 2008 policy memorandum is available for download on this CMS website.
S2KM: Besides structured settlement annuities, what are the most common MSA funding products?
TOM SPRATT: CMS does not mandate any specific type of MSA funding mechanism. Even with annuities, however, CMS does require MSA assets to be retained in an interest-bearing account.
S2KM: Under the current CMS MSA rules, what are the advantages and disadvantages of structured settlements?
TOM SPRATT: Despite having to "over-fund" MSAs with two years of seed money when annuities are utilized, annuities still result in a lower settlement cost in many cases. In addition, the great majority of MSAs are self-administered. The CMS administrative requirements for MSAs are the same for self-administrators and professional administrators. Annuities help prevent premature dissipation of MSAs - especially self-administered MSAs. If an MSA is dissipated prematurely, a beneficiary risks losing Medicare payments. If premature MSA dissipation occurs, workers compensation settlements might be further reduced. Not all states permit workers compensation settlements. Some states preclude the settlement of future medical expenses.
S2KM: In the context of "growing the structured settlement industry", what should the structured settlement industry be doing to improve MSAs?
TOM SPRATT: The most significant issue for the MSA industry, including structured settlements, is the problem of "changing numbers". To reduce delays in its MSA approval process, CMS has encouraged workers compensation insurers and self-insurers to obtain state approval for a settlement before submitting the case to CMS for its approval. Unfortunately CMS often changes the numbers including the seed money, the annuity start date, annual payouts, life expectancy, etc. Of course, this creates havoc for annuity providers and consultants. CMS needs to address this problem of changing numbers.
S2KM: Tom, thank you for the informative interview.
This concludes S2KM's interview with Thomas Spratt about Medicare set-aside arrangements and structured settlements.
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